“North America has set off a supply shock that is sending ripples throughout the world.” – International Energy Agency (IEA) Executive Director Maria van der Hoeven
Anybody questioning the global impact of U.S. shale oil development should have had those questions laid to rest earlier this week when the IEA published its annual Medium-Term Oil Market Report.
“The technology that unlocked the bonanza in places like North Dakota can and will be applied elsewhere, potentially leading to a broad reassessment of reserves,” stated Executive Director Maria van der Hoeven. “But as companies rethink their strategies, and as emerging economies become the leading players in the refining and demand sectors, not everyone will be a winner.”
The report highlights the impacts of continued growth in North American shale oil, which is affecting everything from exploration to refining, transportation and storage.
To put it bluntly, it’s an entirely new world out there in the oil market.
The technology that unlocked this oil is making its way around the globe, so don’t think that the status quo is locked in place. It’s not. Any geographic region sharing similarities with North American shale formations is now a target for shale oil development.
This means many countries’ oil reserve estimates are potentially outdated and understated. A new exploration boom is the only way to know if these reserves exist or not.
As we’ve seen over the past year new oil discoveries in remote locations in Africa and Australia have caused once unknown stocks to soar in value. And I think we’ll be hearing more success stories during the coming months and years since exploration companies, armed with increasing amounts of data, will be able to more precisely locate high-potential drilling targets.
It will be an exciting time for investors who seek out the small exploration companies with potential blockbuster projects. Of course, these companies carry higher risk due to the uncertainties inherent in wildcat-style drilling. So if you go after the big winners, I suggest minimizing the risks by investing smaller amounts of money than you would in an established company.
But the face of the oil exploration industry isn’t the only thing that is changing … and it’s not the only opportunity.
Developing economies are now leading developed nations in oil demand and have the added boost of new refining capacity. This is changing global trading patterns. The Middle East and China will lead the charge, helping to expand global refining capacity by 9.5 million barrels per day (mb/d) over the next five years.
For the risk-averse, a company such as Chevron (NYSE:CVX) is a good way to go. As an integrated oil company, Chevron has upstream (exploration and production) and downstream (refining, selling & distribution) operations all over the globe.
While not the biggest company in the space – Exxon takes that honor – Chevron’s still massive size, global footprint and oil-based portfolio are competitive advantages.
The company’s upstream plans are well integrated with its downstream plans, which increasingly positions the company to sell higher-margin products into growth markets. This means fuel, specialty chemicals and premium-base oils to countries around the Pacific Rim, including Asia, the Americas and Africa.
Chevron’s existing refining capacity is built around this strategy and despite the company being much smaller than Exxon its Pacific Rim distillation capacity is nearly equivalent at just under 15 million barrels of oil equivalent per day (MMBOED)
All of Chevron’s operations boil down to a company that is able to adapt to a changing market over time, focus its efforts and deliver on the bottom line. At the end of the day this is what investors should care about for the majority of their oil-related investment dollars. What’s more, the company pays a reliable dividend that has grown over time and boasts an average long-term return on equity of around 20%.
But if you like a little excitement too, select exploration stocks offer a lot of upside. Over the past two years we’ve had a couple of big strikes with stocks in the Small Cap Investor PRO portfolio. And over the next couple of months I’ll be covering additional oil explorers as they look to apply the same techniques that led to the North American oil “bonanza.”
Tyler Laundon, MBA